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This topic has 0 member replies
Kkz Newbie | Next Rank: 10 Posts
Joined
18 Oct 2016
Posted:
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Sun Nov 20, 2016 6:59 am
Elapsed Time: 00:00
• Lap #[LAPCOUNT] ([LAPTIME])
I would really appreciate it if fellow GMAT test takers / GMAT experts can take some time to review the essay I wrote below and provide feedback.

Read the statement(s) and the instructions that follow, and then make any notes that will help you plan your response. Begin typing your response in the box at the bottom of the screen.
The following appeared in a corporate memorandum of a beverage manufacturer:

“Our promotional price reductions on energy drinks have been highly successful, as we have seen a dramatic increase in unit sales. Further, surveys of our consumers indicate that this promotion was favorably received by the majority of our customers. Therefore, to improve our company’s profitability and enhance its perception in the eyes of consumers, similar price reductions should be offered on all drinks produced by our firm.”

Discuss how well reasoned you find this argument. Point out flaws in the argument's logic and analyze the argument's underlying assumptions. In addition, evaluate how supporting evidence is used and what evidence might counter the argument's conclusion. You may also discuss what additional evidence could be used to strengthen the argument or what changes would make the argument more logically sound.

The corporate memorandum released by a beverage manufacturers stated that they would like to offer promotional price reductions on all of the drinks they sell because they have seen favorable increase in unit sales and positive response by the majority of their customers. The decision based on the reasoning listed is flawed without further consideration of impacts or further usage of data to support the decision.

Firstly, the beverage manufacturer is assuming that they will receive similar responses if a similar promotional price reduction is applied to all other drinks offered by the firm. However, this may not be the case. Perhaps, customers only respond well to reductions in energy drinks because they are typically expensive and are beyond a typical consumer's acceptable price range. It is possible that a reduction on other drinks, such as soft drinks or juices, may not have a similar effect because the price is already accepted by consumers. Therefore, it may not drive similar dramatic increases in unit sales.

Secondly, the beverage manufacturer stated that the promotion was favorably received. The term "favorable" is not a quantitative measure. Does "favorable" mean greater than 90% of customers surveyed like the promotion? Does it mean that greater than 50% of the customers liked it? Or perhaps even fewer? In addition, they did not state the sample size of those surveyed. They stated that "this promotion was favorably received by the majority of our customers". It is highly possible that those customers were already fans of the drinks before, and the response would have been favorable regardless of whether the promotion existed. Furthermore, it is unfair to assume that they will receive similar responses if the promotion is offered on other drinks.

Thirdly, the firm failed to mention or evaluate the financial impact of such discounting. Discounting energy drinks may have drove increased unit sales, but it doesn't necessarily mean that it has a positive margin impact. If the price reduction was significant enough, then the company may have actually lost revenue and therefore reduced their profit margins. Since revenue is effected by both quantity and price, the reduction in price must be offset by the same increase in quantity. If the increase in quantity is less than the increase in revenue, then the margin will actually be lower. Even if the increase in quantity is higher than the reduction in price for energy drinks, it is unfair to assume that the same trend will follow for other drinks offered by the company. It is possible that the other drinks sold have very thin margins already, and any reductions in price will be below the cost to sell the product. Therefore, even if the unit sales increase, it will actually reduce the margin.

Lastly, reduction in price for all goods might set a poor precedent. The customers of the company may come to expect low prices on all of its products. If the company ever decided to raise prices back to the normal amount, they may face severe consumer backlash as that is no longer the "norm" that customers expect.

Therefore, such a statement without further proof is flawed. The decision may not only not drive the expected positive results, but also can lead to severe negative financial impacts. To make the statement more logically sound, they can provide evidence to show that price promotions used by their firm on other products have previously led to positive financial outcomes and positive consumer feedback. Furthermore, they can leverage business models and financial forecasting or sensitivity analysis to evaluate whether the decision will truly drive an increase in profitability. With better supporting evidence and data, the reasoning can become more logically sound.

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